Multiple Timeframe Analysis of the Spot Forex

Introduction

Multiple time frame analysis of the spot forex is by far the most thorough method of analyzing a currency pair. It takes time and effort and this goes against what most forex traders want which is something quick and easy. Most forex traders generally look at only one timeframe. For those of you who want to truly understand how the forex works its imperative to be thorough when analyzing a currency pair and the overall market prior to entering a trade and risking your money.

 
Multiple time frame analysis (MTFA) of the spot forex is completely misunderstood and most forex traders are scared to try to learn it. MTFA is also completely underutilized because it takes more work and most forex traders are looking for shortcuts like forex robots or trading off of one time frame.  A handful of forex traders have mastered MTFA and the number of people who utilize it is slowly growing due to the historical lack of success of forex traders and the dangers of trading on only one time frame.

What is Multiple Time Frame Analysis??

Multiple time frame analysis (MTFA) is the inspection of very basic forex trend indicators and forex charts, starting with the largest trends and time frames, and working backwards down through successively smaller time frames to see how the smaller time frames and trends feed the larger time frames. When the smaller time frames are in agreement with the larger trends you can enter a spot forex trade in the direction of the trend with very good safety. If no trend exists on a particular currency pair the smaller time frames and trends will, at some point, build an uptrend or downtrend. MTFA is completely logical.

The principles of multiple time frame analysis are also fairly simple and if used daily will help you to learn forex trading and have a complete grasp of the forex market. When using multiple time frame analysis the smaller trends are used to enter the larger trends, if a trend is available,  or to observe how the larger trends are built from the smaller time frames. If a larger trend is currently established on a particular currency pair you would enter the trade when the smaller trends and time frames are in agreement with the larger trends, The smaller time frames confirm the continuation of the established trend.

MTFA has been around for nearly 30 years. The MTFA method is applicable to stock and commodities trading, equity options and currency options, and now forex trading. The method is applicable to any currency pair. We are respectful of the strong technical work of Kathy Lien and Brian Shannon outlining MTFA principles and links to their their technical papers are available at the bottom of this Knol.

Mechanics of Multiple Time Frame Analysis

Multiple time frame analysis is conducted as follows. You take a set of simple trend indicators and forex charts and install them on a forex charting platform. Then start with the largest time frame available on the charting platform and “drill down” the charts to the smaller time frames in descending order on one currency pair.

In order to conduct and accomplish a multiple time frame analysis on the spot forex you need the proper forex charting platform and a set of trend analysis tools and indicators to facilitate the process. Some forex charting tools and platforms are very expensive but many are free. This is discussed in detail below.

How many time frames must be examined on each currency pair?? Based on experience about 8-10 time frames is enough but about 10-15 is much better. You can drill down the charts on the top 15-20 traded currency pairs to seek out the best opportunity.

What is the correct number of time frames that must be in agreement to enter a trade?? Based on experience about 3 time frames is enough if you know the direction of the primary trend on the larger time frames.

The first step when conducting a MTFA on a currency pair is to inspect the largest two or three time frames and trends on one currency pair or several pairs you may be interested in trading. See what currency pairs have established larger trends, then see whether the trending pairs are at the beginning, middle or deep into the trend.

Also determine which pairs are not trending on the larger time frames, any currency pair that is not trending is  likely oscillating or ranging up and down between support and resistance. These pairs could be developing a new directional trend at some point or within a few days.

What to Observe When Drilling Down The Charts

Every time frame has its own structure and is independent of the other time frames. The higher time frames trends and the direction of the major trend always overrule the lower time frames. The prices in the lower time frames tend to respect the energy points (support and resistance points) of the higher time frame structure. The support and resistance areas in the higher time frame can be validated by the action of lower time periods. 

One time frame may appear to be chaotic and have its own structure, then the next time frame appears to be smoother cycles and much easier to trade, in this case you would trade the smooth time frame because this is what defines the market condition right now and is easy to read. New trends in the smaller time frames enable us to enter the trends in the larger time frames if a currency pair is trending. MTFA will also quickly determine if a currency pair is not trending on the larger time frames and then verify if the pair is  oscillating or ranging between support and resistance on the smaller ones. If a currency pair is not trending, oscillating, or somewhat chaotic at some point the pair will start to trend and the trend will always start on the smaller time frames on the left as the pair breaks out of its range.

The “drilling down the charts” process enables us to identify the smaller trends which feed the larger trends. It will always let us know whether or not a larger trend is starting or is already established. If a currency pair is deep into its trend or movement, MTFA still works but the risk/reward profile of a new entry changes because the trend may be nearing the end of this move. But once again MTFA will keep you informed of this. Trading off of one time frame will never give you any of this information.

If a currency pair is in an uptrend on the larger time frames and sells off against the uptrend you can use the smaller time frames to detect this and then subsequently re-enter the larger uptrend. This form of trend trading is one of the safest methods available of trading the forex. The currency pair sells off against the primary trend establishes a relative low and then reverses back up into the trend. This can also be done when a currency pair moves up against a larger downtrend. Multiple timeframe analysis facilitates this but looking at one time frame the trader would be totally ignorant of this low risk trading opportunity. 

To summarize MTFA, you navigate to your charting platform and start with largest time frame and "drill down the charts" looking for the trends, oscillations and ranges, choppiness, orderly and smooth movements and chaotic movements and you observe them. You are looking for smooth time frames and trading cycles that are easier to identify visually. If you believe that the market is choppy this should be noted because you will have a higher probability of stop outs on entries into these choppy markets especially if your stops are pretty tight.

Remember smaller time frames feed the larger time frames. The smaller time frames can be observed in a non trending market as larger trends are slowly built day by day.  If the larger time frames are not trending the smaller time frames are most likely ranging or oscillating. If the larger time frames indicate a trend you will know if you are early or late in the trend cycle. MTFA completely strips down a currency pair so you have deep knowledge of its behavior.

Unfortunately.......

Most forex trading platforms and forex charting systems are not properly designed for MTFA and have a fixed number of time frames that you can work with. Most or all forex charting systems are set up with totally arbitrary time frames with no logic path whatsoever and are totally deficient for MTFA.  The reason for this is that the forex industry and the majority of forex traders have not accepted multiple time frame analysis. Therefore the analysis tools that we are provided with reflect this ignorance and these analysis tools are mostly deficient. So for now we are stuck with these forex charting systems so lets review them now and make the best of what the forex industry and software companies have given us.

Here are two forex charting platforms and their associated time frames. The top charting platform with the arrows is expensive and has 7 different time frames. The 7 time frames are interchangeable so you can add additional groups of 7 more preset time frames so that analysis of 14 or 21 time frames is possible quickly. The tool allows for quick navigation through the time frames by simply clicking on the red and green lights but cost is a  limitation on this charting package.

Here is the forex trading software and forex charts platform known as Metatrader. Metatrader  has 9 fixed arbitrary time frames but the time frames are not customizable. This platform is "adequate" for multiple time frame analysis but about 5 or 6 more time frames would be much more than adequate, especially if the time frames were adjustable and not arbitrary. The limitation on this charting package is the number of fixed time frames but cost is not a limitation, it is free via most forex brokers if you open a live or demo forex trading account. Metatrader platforms also include desktop price alarms that are built in, another added plus. The time frames are highlighted in blue.

 

The chart portion of this image is an example of what one chart on one time frame looks like on Metatrader. This example is an M15 time frame or M15 chart, which is 15 minutes per green vertical bar. The red and green lines are a very simple set of trend indicators and the instructions for setting up these trend indicators across all 9 time frames is listed at the bottom of this article with all of the other links. You can use off the shelf trend indicators to conduct multiple time frame analysis. Simple indicators like these exponential moving averages are fine. Just apply them across multiple time frames and this is what they will look like. You will learn to trade the forex and improve your trading substantially with MTFA.

There are other charting platforms available to forex traders and some high end platforms available from forex brokers that have adjustable time frames. These moving averages and simple trend indicators can be set up on these high end platforms provided by some brokers. We applaud the forex industry and some forex brokers in this area as providing access to better charting systems facilitates more forex traders using MTFA which can only benefit all forex traders.

Additional Thoughts on MTFA

Is it possible to make multiple time frame analysis better?? I believe the answer is yes. Incorporating parallel and inverse analysis into the analysis as well as support and resistance to set price alarms for notification of momentum or a possible entry point can all help.

Incorporation of Parallel and Inverse Pairs 

In other words if you would like to conduct an analysis of various trends and time frames on the USD/CHF for example, then you would conduct a MTFA of this pair but you would also need to conduct the same MTFA across the same time frames for at least two more USD pairs at a minimum, like the EUR/USD and GBP/USD. Then you could determine with alot more confidence if there is consistency and agreement between the three pairs, i.e. consistent USD strength or weakness across all three pairs.  Alternatively if there is no consistency with the USD you could also conduct a MTFA of the GBP/CHF and EUR/CHF looking for consistent trends based on CHF strength or weakness.

Then you would know for sure that the USD/CHF is trending, oscillating and ranging, or choppy and you would also know why, then you have done the analysis of the USD/CHF correctly and thoroughly. This exact analysis method can be applied to any currency pair.

Most forex traders will not do this and most forex traders are not thorough. Traders need to see that it is their money at stake so they had better get used to being thorough from now on. The charts are right there start looking at them and take pride in being thorough.

Scalpers may find MTFA to be to their liking because they would be aware and never trade against the larger trends and potentially hang onto trades much longer. One of the biggest reasons people scalp is that they have no idea which direction the trend is on the pair they want to trade. Or they only look at one time frame. Traders scalp the foreign exchange but statistics show that people who hang on longer and ride longer trends make the most pips. All forex traders benefit from MTFA.

Why do traders not use multiple time frame analysis? Mostly because analyzing alot of pairs and time frames takes time and people basically are lazy. They are looking for the next big thing in the forex when the answer is right in front of them. Looking at one forex chart is all they want to do. Most scalpers only look at one time frame and could possibly be trading against a larger trend, or a scalper may be trading at the beginning of a very large move and exit way too early. If you are near the end of a trend you may also enter a trade after a long move and be entering near the end of the trend. This is poor money management under any scenario. Scalpers need MTFA but traders who would like to stay in their trades longer and ride the trend would, by nature require knowledge of MTFA.

MTFA works, it is that simple. Pips can be made and a more thorough analysis of any currency pair is possible and the method is effective, especially when larger time frames and trends are traded for larger pip totals. Money management ratios also improve when you are entering a larger trend. By applying MTFA to multiple forex pairs in the same parallel or inverse group of pairs your odds increase again, this is because you can choose to trade the best and largest trend available in the spot forex and ride the trends longer. The more pairs you analyze, the more potential pips there are, so there is a payoff for your time and effort.

MTFA analysis of the spot forex is here to stay. Traders worldwide are starting to accept and learning to understand the multiple time frame analysis method and abandoning trading on one time frame due to the additional entry risk and past monetary losses. MTFA is a rigorous method or analyzing the forex. But it is not difficult to learn. When combined with parallel and inverse analysis is quite powerful and can lead to high probability trading plans and trade entries. It can be applied to any currency pair using simple, free trend indicators and analysis tools available on the internet from many spot forex brokers. Instructions on how to set up these simple forex trend indicators are at the bottom of this article.

When the Analysis is Finished What Will I Know??

After a forex trader has completed analyzing the market with MTFA he or she will know if the currency pairs  examined are trending, oscillating or ranging, or have smooth or choppy trading cycles. The trader will also know if the behavior of the pair has adequate pip potential to consider a trade or putting together a trading plan.

If you follow the rigorous rules in this article  for conducting MTFA you will also know which parallel or inverse pairs in the same individual currency groups are also trending,  which increases your odds tremendously of making the correct analysis and subsequent trade plan or entry.

You will not be ignorant of the larger trends if there is one in place. MTFA should have a profound impact on any forex trader who discovers it. Knowing if a pair is trending or not would be an immediate criteria for a trader to trade or not trade and his or her trading results would start to improve just by glancing at the larger trends. The impact would be positive and immediate and you would start to develop criteria for preparing trading plans while learning the behavior of currency pairs.

What Do I Do Now ??

Okay you have sold me. I believe in multiple time frame analysis. I have analyzed currency pairs with MTFA, I have found a currency pair in a nice uptrend, the parallel and inverse pairs all verify the direction, what do I do now?? How do I enter the trend??

You are almost ready to trade. You have identified a pair and it is trending, you need an entry plan. The pair you are interested in general will have a nearby support and resistance point. In this case the pair you have identified is in an uptrend so you can look for the next resistance point. Now just go to your forex charting platform and set a price alarm at the next resistance area to intercept the next move. When the price alarm hits check the smaller time frames to see if they are in agreement with the larger trends, as outlined in your MTFA setup, and if all of the trends are in agreement enter the trade.

As a final step before entry check this visual map of the spot forex called The Forex Heatmap (tm).

The Forex Heatmap (tm) is a visual map of the spot forex to verify all of your trade entries. The step by step guide to using The Forex Heatmap (tm) is included in this article in the links at the bottom of the page. Now you can verify your entry into the trend. In this example above you have a buy signal for the GBP/CHF.

Now you are ready to trade the spot forex, you analyzed the market thoroughly across multiple time frames and multiple pairs. You determined the trend on a pair, you analyzed multiple parallel and inverse pairs to verify the high probability of the move on the pair, you have set a price alarm to intercept the move, and you checked The Forex Heatmap (tm) entry verification system to verify your trade entry. You are a thorough and accurate forex trader and are now in a position to win on every trade while other traders continue to struggle scalping with indicators on one time frame.

The Future of MTFA

As I stated above there are some high quality charting platforms that work well with multiple time frame analysis. There needs to be more improvements in forex charting platforms with more time frames that fully adjustable by the end user so you are not stuck with fixed forex industry time frames like H1, H4, etc. which decrease the value of MTFA and handcuff forex traders somewhat. More and more traders will demand charts like this or take their business to another forex broker.

The acceptance rate of multiple time frame analysis is slowly growing and the dangers and risks of trading from one time frame are slowly being revealed to forex traders who will want better trading tools. Forex traders will go with the brokers who have the best tools and move their money elsewhere.

At this time multiple time frame analysis is visual and must be done manually with a lot of computer keystrokes and it does take some time. As you get better at it the process goes much faster. In the future MTFA could be done differently and a computerized system of MTFA using advanced forex trading software where the analysis is conducted by a computer that models the data and conducts linear and nonlinear regression for each time frame with least squares analysis. The program would "optimize" a set of at least three time frames for each pair with the lowest standard deviation or highest degree of smoothness for each of the three time frames for that particular currency pair. The computer program would then print out the customized time frames for the trader to set up and watch. This is a vision of computer analysis of the spot forex that I believe will at some point be accomplished.

Three Articles on Multiple Time Frame Analysis 

My personal journey through multiple time frame analysis started when I was reading stocks and commodities magazine and came across Kathy Liens article. In order to understand the principles of multiple time frame analysis you can consult her technical article titled “Trading Currencies Using Multiple Time Frame's” by Kathy Lien and Patrick Dyess. For a reprint of Kathy Liens article click on the links at the bottom of this article.

I was immediately impacted by Ms. Liens work and I knew that the red and green light software, which had only 4 lights at the time and was the charting platform I was using at the time, was a charting package that needed to be improved upon and at that the software was actually a tool for MTFA, and now everyone else knows this. 

Nobody I worked with understood this software and charting platform and I made it my mission to understand it and to try to be the best at applying this platform to multiple time frame analysis. This evolved into the “Big Lights” method of multiple time frame analysis, and I subsequently put together a set of free trend indicators for multiple time frame analysis on my website that were developed with assistance from others. A link to the free trend indicators for multiple time frame analysis that I have developed are also at the bottom of thisarticle.

Also there is a link to an excellent article on multiple time frame analysis by Mr. Bryan Shannon at the bottom of this article. The Article is titled "Increase Your Odds With Multiple Time Frame Analysis"

These two articles and the MTFA method had so much of an impact on me that I wrote my own original article (this one) on multiple time frame analysis with some new information that includes a discussion of parallel and inverse analysis which could clearly enhance the basic MTFA methods.

Important Links

These links were mentioned throughout this knol they are grouped here for convenience.

Link to the Free Trend Indicators For Multiple Timeframe Analysis
Simple moving averages for trend analysis across 9 different timeframes on Metatrader.

Link to Brian Shannons Article on Multiple Timeframe Analysis

Link to Mark Mc Donnells Article on Multiple Timeframe Analysis

 Link to Kathy Liens Article on Multiple Timeframe Analysis

Link to The Step By Step Guide To Using The Forex Heatmap
A visual map of the spot forex.

Link to Forexearlywarning  
We use multiple timeframe analysis every day to prepare trading plans.

Monitoring Support and Resistance With Price Alarms On The Spot Forex

The forex market is a support and resistance market, all trends start and end at support and resistance. All reversals and retracements start at support and resistance. Forex trading becomes a lot easier if you are an expert at identifying key areas of forex support and resistance.

Short Term Support and Resistance Monitoring

                                 SHORT TERM (Intra-day) SUPPORT ON THE GBP/USD

If near term support and resistance is compared to longer term support and resistance on these simple forex charts and forex trend indicators that we will use in this article then our understanding of forex support and resistance will be strong. So we need to divide forex support and resistance into short term support and resistance and and long term support and resistance.

For analysis of the forex market we use multiple time frame analysis with simple bar chart forex charts, and this is the same way that we analyze support and resistance, across different time frames.

Monitoring Short Term Support and Resistance

If a currency pair is trending you can use price alarms to monitor for breakouts of the short term support or resistance established over the last 18 hours for trade entries while the pairs are consolidating.

To monitor short term support and resistance you can set up my free trend indicators which are available on a piece of trading software called metatrader, the link to setup the free forex trend indicators that look exactly like these charts presented in this article at the bottom with all of the other links grouped together.

Trend indicators work a certain way and you must learn to think like trend indicators work. There are trend indicators you can use every day like these simple exponential moving averages that work extremely well and will help you to learn forex.  These are price related indicators but are historically and exponentially weighted with the near term pricing support and resistance carrying more weight.  Historical data is accounted for in charts and exponential moving averages work in a similar fashion with natural heavier weighting of data to the right side of the chart.

Set up these forex charts on a metatrader platform using the setup link at the bottom of this article and check the M5 and M15 minute charts on several pairs when the pairs are consolidating. Write down the numbers and these are the short term support and resistance levels. You can also call this intra-day support and resistance because these levels have been established in the last 12-18 hours.

The chart you can see above this text is an M15 chart showing intraday support on the USD/CAD, just set your price alarm immediately below the support established on the right side of the chart.

Long Term Support and Resistance Monitoring

                                       LONG TERM SUPPORT ON THE GBP/USD

To monitor long term support and resistance to assist with your forex trading set up the free trend indicators.  But now you need to check the support and resistance on the longer time frames like the H4, D1 and W1 charts. Check out the longer term support and resistance when the pairs are consolidating. Write down the long term numbers and compare the long term numbers to the short term support or resistance numbers. Not exactly too difficult and you will learn forex as it relates to all of the support and resistance numbers on the various pairs on the market.

The chart above shows intermediate to long term support (D1 Chart) on the CHF/JPY at about 76.00 to 76.15. Very easy to spot the support levels.

Setting Better Price Alarms 

                               HOW TO SET UP PRICE ALARMS ON METATRADER

If you decide to set a price alarm off of short term support or resistance be sure to check the long term support and resistance as well on the same pair. In the GBP/USD screenshot you would set the price alarm below the intra-day support on the right side of the chart if the GBP/USD was in a downtrend. Compare the short term support level to the longer term support levels and see how much room there is in between the short term support versus long term support numbers. If the numbers are too close then set your alarm off of the long term support numbers, its just not worth it to try to trade this pair otherwise. In other words if the numbers are close to each other its best to set price alarms outside the long term support or resistance so you have more pip potential if you decide to trade it. Now you can quickly identify the pip potential of any trade.

Sometimes the short term support or resistance numbers match up evenly with the longer term support and resistance numbers and they may match up quite well. If this is the case any breakouts of these prices can produce strong new up trends or downtrends.

On the chart of the CHF/JPY above you could set a price alarm at 76.00 for a potential price breakout of the support level but as you can see it looks like it has held the support nicely over a long period of time and eventually did reverse back up and build an uptrend.

Forex price alarms are also free on a piece of forex trading software known as metatrader. You can set multiple alarms on multiple pairs and always be monitoring the forex for price movement and breakouts at no cost. A phenomenal free tool for forex traders!! Just above this paragraph is a photograph of how to set price alarms on a metatrader platform on any forex pair. Monitoring currency pairs with price alarms will help you to learn forex and always know when the market may be moving.

Price Spikes Versus Areas of Support and Resistance

A price spike is generally not too important when analyzing forex support and resistance. Price spikes can happen around forex news events that you can find on forex news calendars. Trend indicators are more sensitive to areas of support and resistance than price spikes, which are somewhat meaningless to trend indicators. Price spikes are quick jumps or drops in price that quickly recover back to the same price level.

Support and resistance matters a lot to the trend indicators you would use to analyze the market, because the indicators you see in this article are price based. All trends start and end at support and resistance. Learning to identify spikes will also help you to learn forex and their relative lack of importance compared to clearly defined strong areas of support or resistance.

Almost all trend indicators treat spikes as insignificant compared to repeating and continuous areas of support and resistance which are very significant. Trend indicators which tend to smooth data like regression channels and the ones you see in this article are more sensitive to areas of support and resistance versus spikes.

Since most trend indicators including the exponential moving averages pictured here all have historical weighting of price built in to their formulas and algorithms they both "see" all of the historical price data especially recent price data because the algorithms are historically weighted on these indicators.

The indicators shown when the green line converges on the H4 and D1 charts this is an indication of a currency pair stalling at longer term support and resistance. This is why the D1 chart on these free trend indicators matches up so well with most other trend indicators. Convergences of the green line occur when the price stalls on the various time frames and is somewhat obvious on the charts.

This is because as we have said over and over, that all trends start and end at support and resistance.

Repetitive Nature of Support and Resistance

                                THE EUR/AUD OSCILLATING IN A 300 PIP RANGE

Spot forex support and resistance numbers are repetitive on ranging or oscillating pairs, they are also repetitive on long term support and resistance numbers over months and years. Its clear on the charts if you have a close look

Oscillating Currency Pairs  - Some currency pairs are not trending, they are oscillating or ranging up and down between support and resistance as in the example above. Major currency pairs and exotic pairs can do this and they do this all of the time in a non trending forex market. Support and resistance numbers are repetitive on ranging pairs and it is obvious.

Setting up the metatrader forex trading software, these free trend indicators and setting price alarms will help you to learn forex and greatly assist with your forex trading, you will always know when the forex is moving.

Straddle Alarms

                                               STRADDLE ALARM ON THE USD/CAD

Sometimes currency pairs are moving sideways in a tight price range, in this case you can set a straddle alarm. A straddle alarm is two price alarms on the same pair, one is above the tight trading range, one is below the tight trading range. Resistance alarm and support alarm set simultaneously to detect movement in either direction.

In this case after a thorough analysis of the CAD and USD groups using multiple time frame analysis it was unclear what direction the USD/CAD would go so a straddle alarm was set. The reason you set two price alarms of the same pair is that you just do not know what direction the pair will go based on your overall assessment of the market.

In this case it hit the support alarm and a forex trading entry was verified to sell the EUR/CAD based on CAD strength using the Forex Heatmap (tm) which is described below. Remember that this metatrader forex trading software and charting package is free, and so are the alarms and indicators. Metatrader is available from many forex brokers.

What to Do When The Price Alarms Go Off

                         VISUAL MAP OF THE SPOT FOREX - THE FOREX HEATMAP (tm)

So now you know how to set up price alarms and monitor the spot forex pairs for movement using these forex charts. You are now monitoring one or more pairs with price alarms. The London session starts and the heaviest period of market activity is starting including a lot of the forex news.

At some point one or more of your price alarms hits and will go off and the forex market starts moving. Now you get in front of the computer to see if you should enter a trade.  Price alarms will tell you that the market is moving but you still need to verify your entries. There is a new tool now available for entry management and verifying trade entry decisions that most forex traders have never seen, its called The Forex Heatmap (tm).

The Forex Heatmap (tm) tells you at a glance what currencies and pairs are strong or weak and verifies whether or not you should enter a buy or sell on the the pair where support and resistance is broken, Or it could possibly identify an entry on another pair in the same parallel or inverse group of pairs. Price alarms detect price movement but it could be a price spike or fake out (as discussed in the module above). You need to verify your forex trade entries with a reliable tool.  To use The Forex Heatmap (tm) effectively you need a step by step guide to using it. There is a link to this guide on the bottom of this article grouped together with all of the other links.

Reading the Forex Heatmap (tm) is not difficult. For different heatmap configurations you can quickly and at a glance see the pockets of strength and weakness on the spot forex and get your trade platform ready when the configurations are set. A complete library of configurations showing buys and sell signals is in a link at the bottom of this Knol. Forex trading just got a lot easier using this web based forex software. You can learn forex entries and trade much more safely with this tool.  A library of Forex Heatmap (tm) entry signals for various currency pairs is also included at the bottom of this article so you can see what entry examples look like using with this tool.

Layers, Zones and Clusters of Support and Resistance

THIS FOREX CHART SHOWS A CURRENCY PAIR STUCK IN A CLUSTER ON THE             BOTTOM RIGHT, IT ALSO SHOWS A DOUBLE BOTTOM

Sometime a pair is stuck in a broad range dominated by layers and clusters of support and resistance and the trend charts indicate choppiness. This means that the pair is bouncing up and down in a fairly wide price range and is incredibly difficult to trade. The market is not always trending or oscillating in some beautiful smooth pattern. Trading a market like this is riskier and the incidence of stop outs is more frequent. Trade durations are shorter and movement cycles typically last only through one London-USD trading session and then you would exit trades, or else not trade at all. This is easy to recognize just look at the charts but most forex traders do not understand this concept at all but if they did their forex trading would improve. If you want to learn forex try to take this concept forward.

Layers of support or resistance are also referred to as choppy markets, tight ranges, clusters, tunnels, and not to confuse anyone with terminology but they are all danger signs pointing to riskier trades. Trading pairs with a lot of room to move up and down, and not stuck in clusters, is easier.

On this chart above I have one example of a support cluster, Its best not to trade until the price breaks out of the cluster then it will be able to move much easier to trade and larger trends will form. Price alarms should be set on both sides but outside of the cluster at resistance and support looking for a clear shot at pips. The chart shown above is an H4 time frame on our free indicators using the metatrader forex trading software. The link to set these up is at the bottom of this article.

Forex Support and Resistance Technical Paper

Effective Use of Price Alarms 

This technical paper was originally written by Mark Mc Donnell and has been slightly modified for this article

The spot forex is a support and resistance market. Whatever tools and indicators you are using to trade the spot forex market, the experience can be greatly enhanced by understanding near term support and resistance along with longer term support and resistance numbers for the currency pairs you are going to trade.

Every spot forex trader and the major forex dealers and institutions are watching critical areas of support and resistance on the various pairs. If any major pair breaks through a critical support or resistance number it makes news everywhere on the forex news wires or on national and global news shows.

Support and resistance is somewhat repetitive, the major support and resistance numbers tend to repeat themselves over time as the pairs range or trend up and down.

Monitoring the critical areas of short term or long term support and resistance on the spot forex is easy using price alarms. You can use desktop alarms, alarms to wireless devices, or email alerts when prices are breached. Make sure your broker of choice gives you the ability to set price alarms and alerts for notification. They are provide free on most forex trading platforms.

Price alarms can be used for the various needs of a trader.

If a currency pair is trending but currently consolidating price alarms can be used to notify the trader when the trend is resuming so you can intercept the movement. Another use is to set price alarms at specific support or resistance prices where the trend indicators can be reevaluated for profit taking. This assists with money management and profit taking

Another use is for setting price alarms where double tops and double bottoms can occur, the double tops and double bottoms occur frequently on the spot forex and can represent entry points into complete reversals after large sell-offs or up cycles.

Price alarms can also be set to alert a trader when a pair is going in your favor so you can reset your stops up or down to improve your money management or entry management. Price alarms can also be set on top of partial limit orders or entry orders to notify the trader that an order was executed.

Also if a currency pair is not trending but trading in a narrow range a straddle alarm can be used to assist to determining a breakout of the current range.

In conclusion the spot forex market knows where these critical short term and long term support and resistance numbers are, the other traders know where these numbers are, and the institutions also know, this means you should know too, don't waste time staring at the forex all day or all night. Monitor the market with price alarms and go on about your business, get a lot more sleep and still be in the know as to when your favorite pairs are moving.

Forex Support and Resistance Audio Training

If you would like to have a forex support and resistance audio to listen to online or download in MP3 format please go to the link at the bottom of this article. It is a link to a complete forex audio library but find the particular audio on support and resistance and setting price alarms. Within this audio library is an audio on support and resistance you should listen to supplement the information in this article. When you find it just click and play and start listening or download it.  The link to the audio training is at the bottom of this article.

Forex Support and Resistance Slideshow 

This part of the article discusses a complete library of support and resistance slides that you can view on Flickr. It demonstrates many examples of short term and long term support and resistance and clusters (layers), also double tops and bottoms and how to set price alarms. 

The link to the support and resistance slideshow is at the bottom of this article with all of the other links grouped together for convenience.

Look on the upper right of the slideshow on the Flickr page and there is a faint "Slideshow" button to put the slideshow into motion on Flickr, also examine each individual slide slowly if you wish. Each slide in the slideshow can be expanded to full screen if you need that.

Throughout this article we have referenced a set of free trend indicators and price alarms, in order to set up these free forex trend indicators up once again just click on the links at the bottom of this article. This is a complete set of instructions for setting up the free trend indicators, price alarms, and metatrader charts that you see throughout this article.

The Forex Heatmap (tm) also has a complete guide to use for managing entries after your price alarms go off, the link to this valuable resource can also be easily be found in the links below.

Summary and Conclusions

All forex trends start and end at support and resistance, all consolidations, retracements and reversals start at support and resistance on the spot forex.  Let's all work to become experts and strive to be the best support and resistance analysts possible.

Important Links

These links were mentioned throughout this article they are grouped here for convenience.

Link to The Step By Step Guide To Using The Forex Heatmap

Forex Heatmap (tm) Image Library
Link to Image Library of Forex Heatmap (tm) Example Entry Signals

Link to Audio Training Library
Check this library for the MP3 audio on forex support and resistance.

Link to Support and Resistance Slide Show on Flickr

Link to Weekly Forex Trend and Support and Resistance Charts on Flickr

Link to many examples of support and resistance charts updated weekly from our forex webinars.View Flickr slideshow by individual and full screen slides or in the "slideshow" mode.

Link to Free Trend Indicator Setup Link 
These free forex trend indicators were referenced throughout this Knol in all of the photos.

Link to Forexearlywarning
We use support and resistance and set price alarms daily in our trading plans.

Parallel and Inverse Analysis of the Spot Forex

Introduction  

Parallel and inverse analysis of the spot forex can be used two different ways, when conducting the overall market analysis, and at the point of trade entry. Very few, if any, forex traders understand these concepts but as a forex trader the information is critical. If you do not understand parallel and inverse analysis you have almost no chance of being a successful forex trader, but your odds increase dramatically if you understand it well. It can be learned in a very short period of time.

Parallel and Inverse Analysis

Parallel and inverse analysis is the study of how individual currencies influence the movements of currency pairs and their intra-day movement cycles or within the context of a trend. It has also been called currency correlations and individual currency analysis. Few,  if any,  forex traders understand these concepts and essentially nobody is educating traders on this subject. However forex trading success would skyrocket if forex traders would master these concepts. Parallel and inverse analysis of the spot forex can be learned in about two to three weeks by any forex trader at any level.

Eight Major Individual Currencies

Here are the eight most widely traded individual currencies in the spot forex that we will examine in this article:

  USD  US Dollar
  CHF  Swiss Franc
  EUR  Euro
  GBP  British Pound
  JPY  Japanese Yen
  CAD  Canadian Dollar
  AUD  Australian Dollar
  NZD New Zealand Dollar

Please note that an individual currency is not a currency pair, it seems very simple and fundamental but it is the crux of this entire technical paper and essential to learn forex trading. Remembering that a currency pair is comprised of two separate currencies will open your eyes to the pips.

Parallel and Inverse Pair Grouping Examples

An  example of a parallel group of currency pairs is as follows.

EUR/USD
EUR/JPY
EUR/CHF
EUR/GBP
EUR/CAD
EUR/NZD

The EUR is on the left in all pairs and is the common individual currency.

An example of parallel and Inverse group of pairs is as follows:

GBP/CHF
EUR/CHF
USD/CHF
CHF/JPY

The CHF is on the right on three pairs but on the left on the CHF/JPY, the CHF is the common individual currency.  This occurs on other currency pair groups. These are the very basics to learn forex and parallel and inverse analysis.

Basic Discussion of How and Why Currency Pairs Move

First example:

If the        EUR/USD is rising
and the    USD/CHF  is falling

then the USD weakness is controlling and "driving" the movement of both pairs, the USD is weak.

Second example:

If the        EUR/USD is rising
and the    USD/CHF  is also rising

then the USD is not controlling the movement. The EUR strength is causing the EUR/USD to move higher and the CHF weakness is causing the USD/CHF to rise.

In this case the EUR is strong and the CHF is weak so the best pair to trade would be to buy the EUR/CHF. The USD is completely out of the picture in the second example as far as what was driving the driving movement of the market.

These are two of the most basic examples. Not knowing this basic information represents the biggest failing of forex traders worldwide. Although this relationship between pairs and the real reasons for their movement being the movements of the individual currencies is simple and basic it escapes nearly every trader, although the logic is incredibly clear.

This simple, basic logic works for all 28 currency pairs derived from the eight most widely traded individual currencies in the spot forex listed above and can generate 500 to 1000 pips of forex trading profits in a single week of trading.

Lets look at one more example using different pairs and currencies but the same logic.

If the        AUD/USD is rising
and the    USD/CAD  is falling

then the USD weakness is controlling and "driving" the movement of both pairs, the USD is weak.But if both of these pairs are rising the USD is not controlling the movement and the best pair to trade would be to buy the AUD/CAD. This is the same logic as the EUR/CHFexamples above but this time we are using different pairs and currency groups.

Once again, each currency pair has two individual currencies, by looking at other currency pairs in the same groups of pairs you can quickly determine what is driving the movement. In the case if the AUD/USD and USD/CAD example they are either moving in he same direction or opposite directions, or on some trading days not at all.

In this example above the EUR/JPY has been dropping for several days based on some simple trend indicators like exponential moving averages. There is a link at the bottom of this article to a set of simple trend indicators like these. You can check several EUR pairs or several JPY pairs over the same time period on the x-axis and quickly determine if the downward movement on the EUR/JPY over this time period was based on EUR weakness or JPY strength, or possibly both.

If the EUR/CAD, EUR/GBP, EUR/USD and EUR/CHF are all falling over the same time period then EUR weakness is driving the movement over this cycle. If the GBP/JPY, CAD/JPY and AUD/JPY are all falling over the same time period, then the JPY strength is the reason that the EUR/JPY dropped. This is incredibly simple but ignored by almost all forex traders.

Next the EUR/JPY stalls at support, Point 1 on the example chart.  If it reverses back to the upside  at Point 1 once again checking a few pairs will quickly tell you if EUR strength or JPY weakness is driving the EUR/JPY back up.

Now apply this logic to any one of 28 currency pairs comprised of the eight major currencies and you will almost immediately start to understand why currency pairs move and you will almost immediately start to get many more pips out of your trading using the basic individual currency movements. This forex market logic presents itself daily to forex traders but almost no forex traders notice. The forex indicators and systems available now to forex traders do not take this simple logic into account and these systems are all fundamentally flawed.

Using Parallel and Inverse Analysis to Analyze The Forex Market 

Now that we know the basics about parallel and inverse analysis lets move into some new concepts.When you analyze the forex market always analyze currency pairs as a group, by individual currency, not individually as a single pair. Currency pairs are not an island. Analyze all of the USD pairs together, then analyze all of the JPY pairs together, then analyze all of the CAD pairs together, etc. If you do this every day the trends of the market, oscillations and consolidation cycles will jump out at you right off of your charts and into your lap. If a particular group of pairs are all behaving the same way the market becomes a heck of a lot easier to trade. It is also very easy to spot choppiness or a more difficult market and you may consider not trading at all today, and with good reason. 


Getting forex traders to do it this way is nearly impossible. But it is imperative to analyze pairs carefully. Doing so will allow you make better decisions  as to when to trade and it will make a lot more sense as to why you should stay in your trades.  For example if you buy the AUD/CAD and the AUD/JPY and AUD/USD are also trending up its alot easier to make an effort to stay in the trade for a longer period of time based on overall AUD strength. This concept works for any pair and thats why the method is solid.
Here is an example of how to correctly use parallel and inverse analysis to analyze the condition of a particluar currency pair. For example if you would like to conduct an analysis of the USD/CHF, you would first conduct an analysis of several USD pairs using multiple time frame analysis. Conduct multiple time frame analysis of the USD/CHF then repeat the analysis on the EUR/USD and GBP/USD, at a minimum. You would be looking for consistent strength or weakness, trends, oscillations, or movement cycles in the USD. In the event that there is no agreement in the 3 USD pairs you could also conduct an analysis of the GBP/CHF and EUR/CHF looking for consistent trends and movement cycles based on CHF strength or weakness.

By analyzing the USD and then the CHF you have completed your analysis of the USD/CHF. Is this what forex traders do?? No they do not, but it works and it work on any pair any day the forex market is open. Then you would know for sure whether or not the USD/CHF is trending or oscillating and whether the reason was USD strength or weakness or CHF strength or weakness, then you have done the analysis correctly and thoroughly. Most forex traders will not do this and most forex traders are not thorough. They want something that is quick like forex robots or forex news trading and they subsequently lose money. But doing it this way is totally logical and starts to reduce or eliminate entry risk of forex trades.


For a full discussion of multiple time frame analysis of a currency pair please check the links to my other articles located on this blog at the bottom of this article. At the bottom of this article is a link to a set of free trend indicators for multiple time frame analysis.

How Currency Pairs are Constructed

This section is incredibly basic but almost every forex trader is completely blind to it. It is a major failing of almost every forex trader.

Most forex traders treat a currency pair like a single unit, or an island in the forex market. This is a huge error and almost every forex trader does this. They take a currency pair like the EUR/USD and treat it as a single thing, single object or single unit, which is a major and a massive mistake. This is not only a mistake but also a complete fallacy and a complete falsehood that leads to consistent failure.

The EUR/USD is composed of two individual currencies each with their own separate behavior, fundamentals, current condition, news releases,  and reasons for moving up and down. In order to analyze the EUR/USD you must analyze the EUR currency separately and the USD separately.

Look at it this way:              

                                                                      EUR/USD

or this way which is more accurate

                                        EUR                                                                 USD


This visual should tell you how to think about separating the two currencies in any pair for individual analysis.

The EUR and USD are two separate currencies that can both be weak, both be strong, or both be moving in opposite directions at any time in a trading session or within the context of the current market trends. I have tried and hopefully succeeded in proving this so far and especially in the section about market analysis just above this section.

The sum of the parts equals the whole and 1 +1 equals 2 in the forex. The minute you start to treat the EUR/USD as a single unit you have failed before you ever enter your first demo trade. The minute you start to view the EUR/USD as two separate currencies and analyze each currency separately then you not only have a chance to succeed with forex trading, but pips will begin to fall in your lap with some information that is obvious and incredibly basic but completely overlooked by almost all forex traders.

Now you can apply this same logic to any currency pair, it works.

Individual Currency Strength and Weakness

Now that you know how a currency pair is constructed lets investigate further.

Almost all forex traders apply technical indicators to currency pairs, after you read this section of the article you may never do it again or you will at least wonder why you ever did it in the first place.  I have literally seen forex traders take every technical indicator off their computer and charting system after realizing that what you are about to read below is true.

Back to the EUR/USD again. If you buy the EUR/USD the only way it will rise is if the EUR as an individual currency is strong or the USD as an individual currency is weak or both. The best scenario is both because the EUR/USD will appreciate the fastest under these conditions. This is also true if you buy Euros with US dollars at a currency cashier or buy the EUR/USD online with US dollars. It works the same way.

Buying the EUR/USD implies buying the left (base) currency and selling an equivalent amount of the right (quote) currency to pay for the base currency. For example, buying EUR/USD means that you are buying Euros and using US dollars to make the buy, or selling US dollars.

This concept must be fully understood or your forex journey will be short and you will "blow up" account after account and not know why. Technical indicators do not take individual currency strength or weakness into consideration. They never have and they never will and we have difficulties seeing how any technical indicator could work at all except for scalping. Scalping is not trading, scalping is scalping, and there is not a forex trader alive who will admit that they enjoy it.

There are over 150 technical indicators and over 100 candlestick chart types available to forex traders. But indicators do not drive movement on a currency pair. The only thing that drives movement on a currency pair is the currency strength or weakness of the two individual currencies that are in the pair, that's it, that is all, nothing else. In this regard technical indicators are somewhat worthless because none of the 250 indicators can measure this. Technical indicators are applied to pairs not individual currencies, and that is the failure point.

An analogy is this, the only way a car can move is if you step on the gas pedal, this is what actually causes the car to move. Individual currency strength and weakness is the gas pedal for a currency pairs, this is what makes them move. Technical indicators do not make currency pairs move they just "indicate". Indicators are nothing more than drawings on your computer screen.

Since technical indicators are applied to currency pairs, not individual currencies, people who use them are 99% likely to fail. The failure rate of forex traders is incredibly high and now everyone can see why.

I strongly suggest that forex traders start using parallel and inverse analysis to analyze individual currency groups, and individual currency pairs. Traders can also use parallel and inverse analysis of individual currencies also at the point of trade entry in lieu of technical indicators. This is the entire method and rationale presented here.

The entire forex industry is "steeped" in technical indicators and forex robots based on these technical indicators and slowly forex traders are getting fed up with all of this and looking for viable alternatives with credible logic behind them.  These technical indicators originally migrated over from the stock market and stocks in no way behave like currency pairs nor are they constructed like currency pairs.

Trends in the Forex Market

An intermediate or longer term trend can be created by the day to day dynamics of the forex market. As an example lets say that the USD/JPY is consolidating sideways then starts an intermediate to long term uptrend and continues through that trend for a few weeks or a few months. 


Throughout the course of the trend the movement drivers could be the USD strength or the JPY weakness on a day to day basis because the market dynamics can change day by day. In between the movement cycles the pair consolidates or retraces.

Almost no forex trader can explain what a trend really is on the forex, even people who claim to be a trend trader.


This is because they do not understand parallel and inverse analysis. A trend on a currency pair is nothing more than a long series of continuous market dynamics on both sides of the pair that favors movement in one direction. In order for the USD/JPY to build a trend that lasts for several weeks either the USD must be weak or the JPY must be strong or both throughout most of the period. 


If you analyze the forex charts of other USD pairs or other JPY pairs during the period of time when the USD/JPY is trending at least one of those groups will be trending in the same direction. Parallel and inverse analysis wins again with obvious, simple and logical analysis. It wins every time because it is the logic behind the spot forex. Learn parallel and inverse analysis and you will learn to clearly identify and capture pips from forex trends.

This picture depicts a longer term uptrend on the EUR/JPY using simple trend indicators like exponential moving averages. The up trend forms off of the support. The black line represents the movement cycles and consolidation cycles on a conventional price chart like a bar chart, simplified with a black line chart. Each individual up cycle within the trend is either EUR strength or JPY weakness or both. Nothing else. Its that simple.

Remember that a  trend on a currency pair is a long series of movements and  market dynamics on both sides of the pair that favors movement in one direction. In this case each move off of support is EUR strength or JPY weakness. This works on all 28 pairs we follow.

Ranging and Choppy Markets

We just finished discussing what a trend is and what drives a trending market, currency pair or group of pairs,  now lets discuss a totally different type of market, a ranging or choppy forex market.

Once again parallel and inverse analysis comes to the rescue. You now have some new thoughts and ideas as to how to spot a choppy market or choppy group of pairs using parallel and inverse analysis methods.

Generally speaking a ranging market can take on two forms. Currency pairs ranging up and down in large oscillations that are easy to spot and trade. Or tight ranging choppy markets that are so difficult to trade that its best to walk away. In a tight ranging forex market the drivers (market dynamics) change almost daily. One day the AUD is strong the next day the CAD is weak and the next day the USD is strong, etc., and it just continues for days and days.  In a trending market the market dynamics change far less frequently. In a choppy market the individual currencies driving the movement change much more frequently or almost daily.  Or else the same group of pairs moves in different directions on consecutive days. Once again each currency pairs has two sides, so either side of the pair can be driving the movement. If you can identify what parallel and/or inverse group is driving the market you can successfully trade every day. When do the drivers market switch??? They switch drivers during the intra-day consolidations that generally occur after the main trading session and USD session are complete. 

If you are interested in buying or selling a particular currency pair and you read how to properly analyze the forex market you should be able spot a difficult to trade choppy market rapidly. If you conduct a multiple time frame analysis on the USD/CHF and you suspect it is choppy as evidences bu tight trading ranges down to the H1 and M30 time frames, immediately go to the other USD pairs and CHF pairs to confirm. If all of the USD pairs look the same or all of the CHF pairs look the same you have confirmed that that pair or group is choppy. You may still be able to trade another pair then check the USD/CHF again tomorrow.

If you are stuck analyzing and trading the same currency pair day after day without checking other pairs in the same individual currency families you will be ignorant of the market condition that exists on the same group of parallel and inverse pairs. This ignorance will result in stop out after stop out and you will never ascertain why the stop outs are ocurring.

The reason you will be stopped out is a lack of market information which is clearly visible in a simple set of  forex charts and trend indicators that you simply have not checked. These charts are right there on your computer but you have not checked them. You must look at the market deeper.

Conversely identifying a trending market will become much easier as well by checking the parallel and inverse pairs. If the USD/CHF looks like its in an uptrend a quick check of the USD and CHF pairs will confirm the trend. Your trading confidence will skyrocket. This is why all forex traders should review the condition of as many currency pairs as possible in your day to day market analysis routine in the same parallel or inverse currency families that you are interested in trading. Using multiple time frame analysis and drilling down the time frames will unveil what is going on with the pairs you are interested in trading. Combining the multiple time frame analysis with parallel and inverse pairs becomes very powerful.

You may not even trade some of the pairs you analyze but you will know what is going on in the market. As a trader that is your job, to know the condition of the market by examining the forex charts systematically to assist with your forex trading, entries, and trade planning. Identifying a choppy or trending market becomes much easier, and at some point, second nature.

Using Parallel and Inverse Analysis at the Point of Entry

Now that we know why pairs move and how to use parallel and inverse analysis to analyze the spot forex, we can now also apply this knowledge to trade entries.

The number one question forex traders have is "When do I enter??", quite naturally. Once again parallel and inverse analysis will solve this problem. Entry management with parallel and inverse analysis is another application. After you analyze the forex market and you write up your trading plan, you can then set your price alarms at critical areas of support and resistance across some key pairs. Exact instructions to do this are in my article on support and resistance and price alarms, and the link to this article is at the bottom of this article grouped with all of the other links. 


When the alarms go off parallel and inverse analysis can be used for accurate trade entry management. Forex traders need to know when to get in, when to stay out, and when to look at another pair. They need an entry management tool that verifies the trade entry, and here it is:

This visual map of the spot forex is called The Forex Heatmap (tm) and it tells you which individual currencies are strong and weak in real time, it utilizes parallel and inverse analysis to tell a trader what pair to enter and in what direction across 28 pairs. Its basis is parallel and inverse analysis and individual currency strength and weakness.



Throughout the trading week sometimes you can get a “slingshot effect” when a currency pair has a dual driver, one individual currency is strong and the other is weak. Here is an example….If the EUR is strong across the board (all EUR pairs are green on the heatmap) and the USD is weak across the board, then the EUR/USD will “slingshot” and move higher at a much faster rate. A pair with the volatility level on like the EUR/USD will move  at least 150 pips under these conditions. Some of the GBP pairs can move 400 pips in one trading session. Trading with technical indicators is no longer necessary and after using a tool like this does not even seem to make sense anymore.


For a step by step guide to using the Forex Heatmap (tm) see the link at the bottom of this blog article.

Summary and Conclusions

The vast majority of forex traders, almost all of them, don’t even know what parallel and inverse analysis is, much less understand it or use it daily in their forex market analysis or trade entries. I am asking all forex traders to become experts at parallel and inverse and use it to analyze the market and at the point of entry. Forex traders will never realize the real profits of the market until they become experts at parallel and inverse analysis, which drives the movement in the entire market every day. Technical indicators and the forex robots based on the same technical indicators proliferate the forex trading communities and cause a lot of grief and trading losses. Forex traders want and need alternatives that work to produce solid pips.
Thorough knowledge of parallel and inverse analysis will permanently change the way you think about the forex and why currency pairs move.

List of Important Links

Link to Article for Multiple Time Frame Analysis

Link to Free Trend Indicators for Multiple Time Frame Analysis

Link to Article on Setting Price Alarms

Link to The Forex Heatmap (tm)

Link to The Step By Step Guide to Using The Forex Heatmap (tm)

Link to Forexearlywarning.com   

We use parallel and inverse analysis every day to prepare forex trading plans

Link to Parallel and Inverse Slideshow  

Please review this high quality slideshow as part of this article.